Russell Sale an Opportunity to Review Investment Benchmarks

One retirement industry expert says the London Stock
Exchange Group’s purchase of the Frank Russell Company, also known
as Russell Investments, is a good opportunity for retirement plan fiduciaries
and investors to think a little deeper about how their portfolios are built and
measured.

The London Stock Exchange Group (LSEG)
owns the FTSE Group, the operator of indexes including the FTSE 100, which
tracks the top 100 stocks traded in London. The deal with Northwestern Mutual
brings together $5.2 trillion of assets benchmarked to Russell, according to
the firms, and an estimated $4 trillion of equities benchmarked to FTSE. LSEG
also gained control of Russell Investment Management as part of the deal, which
has $256 billion of global assets under management and $2.4 trillion of assets
under advisement through its consulting division. (See “Northwestern Mutual Sells Russell for $2.7B”)

Many retirement plans use Russell or FTSE indices, notes Jeff
Elvander, chief investment officer for NFP Retirement. He says the deal
probably will not have a major impact on the firm’s end clients in the retirement
space—i.e., participants—but financial advisers and retirement plan sponsors
may have more to discuss.

Elvander feels LSEG is a good fit
because Russell remains with a parent company that lines up with its
existing business model. “And it’s
an established company that already understands the indexing business
and already has
the popular FTSE indices,” he adds. “The success of those products shows
they get the
industry and they’re really looking to bolster and expand their
footprint. There
were many different potential outcomes, and I think this is a good fit
in terms
of where Russell ended up.”

He tells PLANSPONSOR the most significant impact may be on plans using funds or model portfolios that Russell manages directly.

“I think that these sponsors will want to ask their advisers and
consultants about what this means for their participants invested directly in
Russell funds or portfolios,” he explains. “It’s not the biggest aspect of the
deal—Russell only manages about $250 billion—but LSEG hasn’t had a direct investment
arm as part of its operations before. So I think there should be some interest
there for plan sponsors and participants just to make sure they understand how any
products or services could be impacted by the transition.”

To date,
Russell has not outlined specific plans to change that part of the business, Elvander
observes, “but it may be in play moving forward, so it’s something sponsors
should be aware of.”

Elvander predicts a muted impact for plans only using
Russell indices, but it's still important for sponsors and their advisers to pay attention.

“I don’t think they will feel much of an immediate impact,” Elvander
predicts. “However, it should probably be talked about in the ongoing
discussion between the adviser and the sponsor. This deal becomes part of the
larger benchmarking question. Plans should already be asking things like, how
are my indices constructed? What are my benchmarks comprised of and why have we
picked the benchmarks we are using today? The same thing applies whether we’re
talking about sponsors using Russell, MSCI, FTSE or any other index provider.”

As Elvander observes, Russell is actually the larger of the
two entities involved in the merger, so there is a lot of value LSEG is gaining
too. “In fact, we may see more changes to the FTSE indices than
the Russell indices, if that makes sense, just because LSEG is gaining all of
this intellectual knowledge and capability from the Russell organization that
it didn’t have before, coming from the Russell platform and the Russell
staffers,” he continues. “So, sponsors will not just want to look at the
Russell side but also at what changes could be pending for FTSE and LSEG.”

Looking
at the existing indices offered by Russell and FTSE,
Elvander notes
there is just a little overlap in the global indices space. “Perhaps
those indices will be blended in the future, or one will be chosen and
the
other will be phased out for business purpose," he speculates. Although
it’s a relatively small overlap, he says "it could result in some assets
needing to find new benchmarks at
some point. This is true whether an index is cut or if its methodology
changes
significantly.”

Elvander concludes by observing there could be additional
deals of this type in the future—given the nature of indexing as a scale
business and the wider trend of consolidation in the investment services domain.

“It’s like when a recordkeeper has a platform that is built,
and then makes acquisitions or creates partnerships to push it out faster,” Elvander
explains. “Well, these indices are built and the owners are looking to leverage
scale. I think you can draw something of a parallel across both the
recordkeeping piece of the industry and the
indexing-services side.

“In
the end it’s an opportunity to ask the larger questions in terms of how
assets
are being benchmarked and whether sponsors and participants understand
it
all,” he says. “In a merger there tends to be some gains and some
trade-offs. As I said earlier, I think this marriage between Russell and
the FTSE Indices could be promising in terms of the indexing options
that will come out in the future.”